Tuesday, May 10, 2011

May 10: A group of Democratic Senators today announced legislation which they say would "finally put an end to the unfair tax subsidies that only benefit Big Oil's bottom line and CEOs." [See WIMS 5/6/11]. They said the nation's five largest oil companies (BP, Exxon, Shell, Chevron, and ConocoPhillips) have taken home nearly $1 trillion in profits over the past decade. In a release they said, "As families are paying more than $4 per gallon in gas prices and doing their part to address the country's growing deficit, Big Oil needs to step up to the plate and share in the sacrifice to help balance the budget.

U.S. Sens. Robert Menendez (D-NJ), Sherrod Brown (D-OH), Claire McCaskill (D-MO), and Jon Tester (D-MT) announced the introduction of the Close Big Oil Tax Loopholes Act, which they said will put an end to "taxpayer handouts" to the 5 largest oil companies making record profits, and use the billions in savings to help reduce the deficit. The Senators also called on Republicans to support the effort to close the loopholes and join other Republicans, including Speaker Boehner and Representative Ryan, who have voiced support for cutting subsidies [See WIMS 4/27/11]. Reportedly, additional Senators Reid, Durbin, Schumer, Murray, Leahy, Reed, Bill Nelson, Lautenberg, and Whitehouse have also signed on to the draft legislation.

Senator Menendez said, "At a time when families are feeling the pain at the pump and our deficit keeps growing at an alarming rate, we simply can't afford to keep giving away billions in taxpayer handouts to oil companies that are doing nothing to help lower prices. The 'Close Big Oil Tax Loopholes Act' is based on a simple premise: we need everyone to do their share to lower the deficit, not just working families and the elderly." Last week Senators Menendez and Frank Lautenberg (D-NJ) condemned legislation that passed the House of Representatives on May 5 which they said would weaken drilling standards and expedite drilling off the Virginia Coast -- less than 100 miles from Cape May, NJ.

Senator Brown said, "It's bad enough that Ohioans have to pay more than $4.00 a gallon at the gas pump. They shouldn't need to subsidize the oil industry through the tax code as well. Big Oil is reaping big profits while working- and middle-class Ohioans struggle to make ends meet. It's about time this corporate welfare meet its end."

Senator McCaskill said, "If we are going to get serious about addressing our national debt, we can no longer afford to keep giving away taxpayer's money to the most profitable companies in the world. There are going to be some tough decisions when it comes to cutting back, but I hope we can agree that our government writing checks to oil and gas companies with tax dollars should be on the chopping block." Senator Tester said, "For years, the world's biggest oil companies have slipped their way through every loophole in the book to pad their profits at the expense of American taxpayers. This bill restores fairness and holds these corporations accountable to taxpayers, who deserve no less."

The Senators cited a recent report from Citizens for Tax Justice indicating that Big Oil companies spent most of their profits in the purchase of their own stocks and boosting their dividends between 2005-2010. In 2010, four of the largest "Big Five" oil companies (excluding BP due to the oil spill) allocated only 18 percent of their post tax profits on exploration and 60 percent on dividends and stock repurchases. The Senators released a summary of the bill as follows:

Modifications of foreign tax credit rules applicable to major integrated oil companies which are dual capacity taxpayers. U.S. taxpayers are taxed on their income worldwide, but are entitled to a dollar-for-dollar tax credit for any income taxes paid to a foreign government. U.S. oil and gas companies have been accused of disguising royalty payments to foreign governments as foreign taxes. This allows them to lower their taxes in the U.S. The bill would close this loophole that amounts to a U.S. subsidy for foreign oil production for the Big 5.

Limitation on deduction for income attributable to the production of oil, natural gas, or primary products thereof. In 2004 Congress enacted Section 199, the domestic manufacturing tax deduction. In 2008 Congress froze the Section 199 deduction at 6% for all oil and gas activity. The bill eliminates the Section 199 deduction for the Big 5.

Limitation on deduction for intangible drilling and development costs. Would deny the Big 5 oil companies the option of expensing Intangible Drilling Costs (IDCs) and require such costs be capitalized. IDCs are expenditures such as wages, fuel, repairs, hauling, and supplies necessary for the drilling of oil wells. Currently, integrated oil companies can expense 70% of the cost of IDCs. The bill requires the Big 5 to capitalize all of its IDC costs.

Limitation on percentage depletion allowance for oil and gas wells. Firms that extract oil and gas are permitted a deduction to recover their capital investment under one of two methods. Cost depletion allows for the recovery of the actual capital investmentthe costs of discovering, purchasing, and developing the well -- over the period the well produces income. Under this method, the taxpayer's total deductions cannot exceed its original investment. Percentage depletion allows the cost recovery to be computed using a percentage of the revenue from the sale of the oil or gas. Under this method, total deductions could (and often do) exceed the taxpayer's capital investment. The bill repeals percentage depletion for the Big 5.

Limitation on deduction for tertiary injectants. Tertiary injectants are used in enhanced oil recovery to drive more oil from an existing well. Currently, oil companies are allowed to deduct the cost of tertiary injectants rather than capitalizing their costs and recovering them over time. The bill requires the Big 5 to capitalize the cost of tertiary injectants it uses during the year and recover those costs over time.

Deficit Reduction. All savings realized as the result of the bill's elimination of the tax breaks and other subsidies currently going to the major integrated oil companies are devoted to deficit reduction. They said $21 billion would be recouped over 10 years.

Senate Majority Leader Harry Reid (D-NV) also issued a statement saying, "There's clear waste in the federal budget and the tax code. And then there's Big Oil. We're giving billions and billions of dollars every year -- $4 billion to be exact -- every cent of it taxpayer money -- to oil companies that already are more than successful. These oil companies made $36 billion in profits during the first quarter of this year alone. Exxon made 70 percent more this year than last year. The industry's $36 billion in quarterly profits means it's making $12 billion a month. That's $4 billion a week. And yet the U.S. government is giving these companies $4 billion a year in corporate welfare?

"Why are taxpayers on the hook for oil companies that are doing just fine on their own? If we're serious about reducing the deficit, this is an easy place to start. It's a no-brainer. Let's use the savings from these taxpayer giveaways to drive down the deficit, not drive up oil company profits."

Senate Minority Leader Mitch McConnell (R-KY) discussed the issue on the Senate Floor yesterday morning and said in part, "Every time gas prices go up, Democrats claim there's nothing they can do about it. Then they propose something completely counterproductive just to quiet their critics. This time it's a tax increase. That is the Democrat response to high gas prices: a tax hike. Well, the first thing to say about this proposal is that it won't do a thing to lower gas prices. In fact, raising taxes on American energy production will increase the price of gas. "Oh, and it would also make us even more dependent on foreign sources of oil.

"That's not my view. That's the view of the independent Congressional Research Service, which concluded in March that the Democrat's proposed tax increase on energy production would, `make oil and natural gas more expensive for U.S. consumers and likely increase foreign dependence.' Sounds like a brilliant strategy. . ." Senator McConnell said the solution is "to develop our resources here at home"; "cut through the bureaucratic red tape that prevents companies that are authorized to explore here from getting to work"; "stop penalizing American producers with new fees and threats of tax hikes"; and "call an end to the anti-energy crusade of the EPA."

He said, "They [Democrats] need to end an approach that hasn't changed since the days of Jimmy Carter. Just like Carter before them, today's Democrats are using the crisis of the moment as an excuse to push their own vision of the future with a `windfall profits tax' on energy companies; and just like Carter before them, they have rightly been accused of bringing BB guns to a war. This is a serious crisis. It's time for serious solutions. . ."